There is a growing potential that the stock market is and could be more bifurcated going forward, where explosive spending on artificial intelligence (AI) implementation feeds the bulls within the mega-cap tech sector while the U.S. consumer begins to dial back spending in a meaningful way due to ongoing inflationary pressures. The latest University of Michigan consumer sentiment index dropped to 67.4 in May 2024, which is the lowest level in six months.
New unemployment claims in the United States for the week ending May 4 showed an increase of more than 10% from the previous week, with the number of workers filing for benefits going from 209,000 to 231,000, according to the U.S. Labor Department. The increase was the largest since August 2023. Weekly unemployment claims are considered a proxy for the number of layoffs taking place during a specific week and an indication of the direction of employment generally.
The decline is attributed to several factors: persistent inflation, persistently high interest rates and newfound fears of unemployment. Investors are well aware that consumer spending is the main driver of domestic growth, with the May reading a shot across the bow of the bull market’s ship of prosperity. And yet, these cautious consumer readings have come before, only to be proven temporary.
“Perceptions don’t always match reality and we think the fundamental backdrop remains strong enough to keep consumers spending,” said Oren Klachkin, an economist at Nationwide Financial, in a research note. “Rising incomes offer a healthy offset and will prevent consumer outlays from retrenching on a sustained basis.” When upper income earners are enjoying stock market and real estate market gains bolstered by the unemployment rate holding under 4%, the bulls remain in control.
To be quite clear, the stock market doesn’t spend time wondering about the economic condition of the 73% of Americans living paycheck to paycheck, as few of them have little or any ownership in the stock market. The market cares about the other 27% of those investing, and more importantly, about the top 10% of Americans that control 93% of total stock market holdings and the 1% that own $44 trillion in total net worth thanks to a record-breaking stock market. (Source: markets.businessinsider.com)
As to the big picture for consumer spending by the haves and have-nots, the nation’s biggest retailers are sensing a more cautious consumer shaping up for the second half of 2024, which, in my view, is not at all yet factored into the Fed’s higher-for-longer policy stance, regardless of recent dovish rhetoric.
Iconic consumer brand retail companies are raising caution flags in some of the cheapest areas of spending: everyday items under $5-10. Starbucks lowered expectations for its full-year sales and profit in late April after a terrible quarter that saw a slowdown in store visits worldwide. Starbucks reported a sharper and faster decline in spending in the United States than it had anticipated. McDonald’s said last month that it will increase deals and value messaging to combat slowing sales. The fast-food giant said inflation-weary customers are eating out less often in many big markets.
With the understanding the stock market cares most about the high-income earners that support stock ownership, it should resonate that companies like Google laying off 12,000 people in 2023 and thousands more in 2024 to “improve velocity,” whatever that means, should take note that these multiple six-figure salaried layoffs begin to matter to the economy when it’s more than just Google reducing high-paid headcount.
The list of blue-chip companies laying off well-paid employees is growing. Tesla recently announced a sweeping round of layoffs following a major layoff that eliminated 14,000 jobs company wide, which included the majority of the 500-person team overseeing the charging infrastructure division. Dell Technologies has laid off 13,000 workers to date, almost double the number of people it previously indicated.
For 2024, job conditions in the high-paying tech space aren’t looking much better. In 2023, more than 1,190 technology companies laid off some 262,000 workers, according to layoffs.fyi, which tracks layoffs in the tech industry. The biggest layoffs in 2023 were at big-name companies, including Amazon (27,410 workers), Meta, which owns Facebook and Instagram (21,000), Google (12,115) and Microsoft (11,158).
So far in 2024, over 34,000 employees have been laid off among more than 140 tech companies, according to layoffs.fyi. Some of the big names this year include Snap (which owns SnapChat), Zoom, PayPal, Salesforce, Microsoft, eBay, TikTok, Wayfair, Google, Discord and Audible. With this said, it is also reported that many skilled workers were able to find new work at other companies, but the sudden change in employment tends to spark a more cautious approach to spending when it becomes the norm for big-cap tech to announce major job cuts.
Most investors seem to accept the news of layoffs when they impact very cyclical and seasonal businesses like travel and retail. When announcements of scores of layoffs occur in what many believe to be bulletproof business models in namely big-cap high-tech companies are sizeable, it causes one to sit up and take notice. This is the sector where supposedly the greatest amount of investment capital is dedicated to the broader economy. If there is a canary in the coal mine, it’s when the Teflon tech crowd gets nervous and stops buying a $7 cup of specialty coffee. Something to think about.
